Shangri-La Hotel
Sydney, New South Wales
[check against delivery]
It is no exaggeration to say that this year’s Budget ushered in a new era for Australian research and innovation.
The Budget included $3.1 billion in new spending on these policy areas over four years.
The total Commonwealth allocation for research and innovation will be around $8.6 billion in 2009-10 – up 25 per cent on last year.
[Slide 1 – budget]
That’s the biggest increase and the biggest commitment on record.
This significantly increased investment gives immediate effect to Powering Ideas: An Innovation Agenda for the 21st Century, which was also released on Budget night.
Power Ideas is a ten-year strategy to lift Australia’s innovation capacity and performance.
It is a strategy:
• to improve the quality and impact of public sector research
• to increase the supply of skilled researchers – for industry as well as for the academy.
It is a strategy:
• to improve the dissemination of new technologies, processes and ideas and
• to secure value for Australia from the commercialisation of Australian R&D.
Consistent with CEDA’s vision of increasing innovation partnerships, it is a strategy to promote collaboration within the research sector, and between researchers and industry – both domestically and internationally.
It is also a strategy to drive innovation in public policy development and service delivery.
Powering Ideas sets a number of specific goals.
These include:
• increasing the proportion firms engaged in innovation by 25 per cent
• lifting the number of research groups performing at world-class levels and
• getting more businesses doing R&D.
But this is by no means the limit of our ambition.
Our aim is to build the creative culture Australia needs to support new industries, new services, new levels of intellectual achievement, and new forms of social engagement.
When I spoke to this forum last year, I talked about making innovation a way of life.
That’s what Powering Ideas sets out to do.
Economic diversity
CEDA and its members understand better than most why we need policies and programs to support innovation.
In its submission to the Review of the National Innovation System, CEDA touched on the advantages of economic diversity, which it suggested we need:
• to underpin national security
• to cushion the economy against sectoral booms and busts
• to maintain a balanced export portfolio and
• to create high skill, high-reward jobs.
Countries that rely excessively on one or two industries forego these advantages.
Australia needs strong manufacturing and service industries to balance our natural advantages in resources and commodities.
Without them, our economy will be less prosperous and less resilient.
Our very standard of living will be at risk.
That’s why we must strive to be as competitive as possible in the widest possible range of industries.
That’s why we need to accelerate the production and dissemination of new knowledge – knowledge we can use to build competitive advantage in the global marketplace.
That doesn’t mean we abandon traditional industries and traditional communities.
What it means is that we increase the knowledge-intensity and innovation capacity of all industries – and of Australian society at large.
China
If you think talk of declining living standards is unduly alarmist, you might want to consider the case of China.
China has sixty times Australia’s population, but only four times our nominal GDP.
According to figures released by the World Bank last week, China’s GDP per capita was US$2,474 in 2008.
Australia’s was US$38,444.
This may seem like an insurmountable gap, but sometimes it is worth taking the long view.
That’s what Professor Angus Maddison has done in his thought-provoking work for the OECD on global GDP over the last two thousand years.
Maddison factors out differences in purchasing power, commodity prices and exchange rates to produce more realistic comparisons between nations and epochs.
He suggests that in the sixteenth century, Chinese and Europeans enjoyed much the same standard of living.
China was still generating a third of global GDP as late as 1820 – although by that time, GDP per capita was two or three times higher in leading western countries, including the United Kingdom, the Netherlands and the United States.
[Slide 2 – China historic]
The gap continued to widen over the next century and a half – until by 1973, China accounted for less than 5 per cent of global GDP, and its per capita GDP – as measured by Maddison – was below even Africa’s.
There are many factors at work here, but the main cause of this decline is clear.
While the western world was propelled forward by the Industrial Revolution – already well under way in 1820 – China stood still.
The performance of the United Kingdom, Germany and the United States – the world’s first great industrial powers – over this period is the reverse of China’s.
[Slide 3 – UK-US-Germany historic]
If anyone doubts the transformative power of the innovation – and especially of manufacturing – they should pause to reflect on Professor Maddison’s data.
Of course, history didn’t end in 1973.
As the charts show, China’s share of global GDP has grown dramatically over the last three decades.
So, by the way, has India’s.
The share generated by the UK, the US and Germany has shown a corresponding decline.
China’s revival is further testimony to the power of innovation.
When the late Chinese premier Zhou Enlai was asked for his assessment of the French Revolution, he famously replied, “It is too early to say.”
The same might be said for the Industrial Revolution, which is still very much a work in progress 250 years after it began.
Chinese innovation
Nowhere is that more obvious than in China today.
China’s total R&D expenditure as a share of GDP has been growing 8 per cent a year on average since the mid-nineties.
The figure for Australia is 2 per cent.
China’s business expenditure on R&D as a share of GDP has been growing even faster – at an average of 13 per cent a year.
Australia has managed less than 3 per cent.
As a result, the once wide gap between us has all but evaporated.
[Slide 4 – Australia and China BERD]
In 1995, Australia had three times China’s business R&D intensity.
Today, the two countries are near parity, with China set to overtake us at any moment – if it hasn’t done so already.
The effects of its increasing R&D investment are not hard to see.
In 2006, China moved ahead of the European Union, the United States and Japan to become the world’s largest exporter of high-tech goods – aerospace equipment, armaments, ICT and other electronics, pharmaceuticals, scientific instruments, chemicals and advanced machinery.
And that’s China minus Hong Kong, which itself ranks sixth among the world’s high-tech exporters.
Announcement
China’s rapid modernisation presents huge opportunities for Australia.
We already collaborate extensively on research and innovation in fields as diverse as carbon capture and storage, remote sensing and water management.
Australia has much to gain from closer links between our two innovation systems.
Later this week I will be travelling to China with the Minister for Trade, Simon Crean, and Australian business leaders to pursue new opportunities for collaboration – particularly by integrating Australian companies into Chinese supply chains and building new innovation partnerships in manufacturing.
Global recession
So, this is the challenge Australia faces.
We have the prospect of China and India being reinstated to the position they occupied for eighteen centuries before the Industrial Revolution, when together they accounted for half of the world’s output.
We have a host of new players entering the game – from Brazil, to South Africa, to the countries of our own region.
And we have the old industrial powers like the United States defending their position by redoubling their innovation efforts – President Obama has made it very clear how serious he is about this.
We on the Labor side of politics have been thinking about this challenge for a long time.
We were aware that Australia was in very real danger of being left behind.
That’s why we came into government with a clear commitment to revitalising the national innovation system, and why we immediately launched the Review of the National Innovation System.
A week after the review panel’s report came out, Lehman Brothers collapsed.
Getting Australia through the global recession has been the Government’s number one priority since last September, but we have never lost sight of our long-term reform objectives – including our objectives for the innovation system.
Over the last eight months, the Commonwealth has invested $77 billion to shield Australia from the worst effects of the crisis.
Seventy per cent of this expenditure is going into capital works.
The International Monetary Fund and the World Bank have both had flattering things to say about Australia’s stimulus strategy.
That is welcome, but what really matters to us is that the strategy has proven very effective in supporting Australian jobs and growth.
We are doing much better than other developed countries on both counts, with stronger growth ...
[Slide 5 – March quarter GDP]
... and fewer people out of work ...
[Slide 6 – May unemployment]
We are also doing significantly and demonstrably better than we would have done without the stimulus.
Growth is higher than it would have been.
[Slide 7 – growth with stimulus]
And unemployment is lower than it would have been.
Treasury estimates that our actions will support up to 210,000 jobs, and knock 1½ percentage points off the unemployment rate we would have reached if we’d done nothing.
[Slide 8 – unemployment with stimulus]
At the beginning, I talked about the $3.1 billion increase in Commonwealth spending on research and innovation in this year’s Budget.
Like all our investments since the global crisis began, this expenditure is designed to drive both recovery and reform.
We are not spending money on research and innovation despite the economic and fiscal challenges Australia is facing.
We are making them precisely because research and innovation can help us answer those challenges.
A report released by the OECD last month reminds us that R&D and patent activity move in lock-step with GDP.
[Slide 9 – R&D and GDP]
They increase when economies grow, and collapse when economies contract.
The Government is determined to counter this cycle and keep the innovation pipeline open during the present downturn.
This is absolutely critical if we want to speed recovery, lift long-term growth and open up new pathways to prosperity.
Much of our new spending on research and innovation is going into infrastructure.
This is true of all our stimulus spending, but I like to think that research infrastructure is special.
It can do more than increase economic capacity – it has the potential to transform our economy.
It can do more than increase social engagement – it has the potential to remake social conditions.
Joseph Schumpeter once said that you can build as many stage-coaches as you like, but you still won’t have a railway.
The research infrastructure we are building will enable us to make precisely this kind of qualitative leap.
Super Science
Let me conclude by quickly running through the Budget measures.
There is $1.1 billion for a new Super Science Initiative.
[Slide 10 – Super Science]
It includes:
• $387 million for Marine and Climate Science
• $160 million for Space Science and Astronomy and
• $504 million for Future Industries – biotech, nanotech, nuclear science and ICT.
Last week I had the pleasure of visiting the Australian Institute of Marine Science in Townsville – a vital part of my far-flung empire.
It will receive the biggest funding boost in its 37-year history under the Super Science Initiative.
The money is being used to build facilities that will employ 200 people during the construction phase and fifty scientists long-term.
It will help us understand, protect and unlock the potential of our vast ocean territory.
University research
The Budget also includes an additional $703 million over the next four years to put university research on a more sustainable footing.
[Slide 11 – University research]
That money is being used:
• to address the gap in funding for the indirect costs of research
• to run the new Joint Research Engagement and Collaborative Research Networks schemes
• to increase Australian Postgraduate Award stipends
• to improve the indexation of research block grants and
• to implement Excellence in Research for Australia, which will measure the quality of Australian university research against the world’s best.
Benefits of research spending to business
The Budget’s very substantial new investment in university and other public sector research is of more than passing interest to the business community.
For example, the Future Industries component of the Super Science Initiative is focused squarely on the needs of high-tech firms.
We are also giving universities a much stronger focus on collaboration and industry engagement to ensure that business has access to the knowledge they create.
And we are counting on the private sector to build the infrastructure component.
R&D Tax Credit
These are very important spin-offs, but the Budget also increased direct support for business innovation.
The most significant new initiative – indeed, the most important reform in this field for at least a decade – is the new R&D Tax Credit.
[Slide 12 – R&D Tax Credit]
It will be worth around $1.4 billion a year and provide more predictable and more generous incentives for private sector research and development.
There will be a 45 per cent refundable credit for Australian firms turning over less than $20 million, and a 40 per cent non-refundable credit for larger firms, including international ones.
This doubles the base rate of R&D support for smaller firms, and boosts the rate for larger firms by a third.
Companies in tax loss will be able to take the refundable credit as cash in hand.
International companies doing R&D in Australia will be able to claim the non-refundable credit, regardless of where the intellectual property is held.
The R&D Tax Credit starts in 2010-11.
In the meantime, the Government is supporting smaller innovative firms in tax loss through the global downturn by increasing the amount they can spend on R&D, and still be eligible for a tax offset, from $1 million to $2 million in 2009-10.
We will be talking to industry now about how best to implement the R&D Tax Credit, with a discussion paper to be released soon.
If you have views on this, you should make them known.
Commonwealth Commercialisation Institute
The second headline item in the Budget for innovative businesses is the Commonwealth Commercialisation Institute.
[Slide 13 – CCI]
It will receive $196 million over the next four years, with ongoing funding of $82 million a year thereafter.
The Review of the National Innovation System argued that innovation support should match “the various identifiable stages of an innovative firm’s life”.
The new institute will provide that support.
It will speed the commercialisation of ideas developed by universities and publicly funded research organisations as well as by private firms – whether those ideas manifest themselves in products, processes or services.
It will help innovative companies access the expertise and capital they need to traverse the valley of death that stretches between research and revenue.
Importantly, it will use Commonwealth support as a lever to prise loose additional private sector investment.
Consultations on the design of the institute are under way.
Once again, I urge you to get involved.
The future
Our highest priority in framing the Budget was to steer Australia safely through of the global recession.
Yet we were also determined to tackle the challenges that will still be with us long after the downturn has passed.
To quote from Powering Ideas: “The world will emerge from the present crisis more competitive, more connected, and hungrier than ever for new ideas and technologies.”
The Budget makes a strong statement about both our belief in, and our expectations of, researchers and innovative businesses – including our expectation that they will do a lot more work together.
It is my very sincere hope that CEDA will continue to be a partner in that work.